Saturday, January 28, 2006

After scrapping their proposal to buy Berjaya Sports Toto shares, the company announced it plans to consolidate its business by selling all its non-core businesses and concentrate on its chain of 7-Eleven business.

Sounds fair.

But what about the market players who 'invested' in Intan based on their early announcement to buy shares in Berjaya Sports Toto? Without this share purchase, it would appear that the current share price is not justifiable given the historical poor earnings from Intan.

And here is a news clip from Business Times citing TA Securities sell recommendation on Intan.

TA Securities has changed its recommendation on Intan Utilities Bhd to a "sell" from a "buy", after the company cancelled plans to buy a substantial stake in lottery firm Berjaya Sports Toto Bhd (BToto).

The research house also cut the fair value of Intan to RM1.91 from RM4.18 based on a 12 times price earnings ratio (PER) for the financial year ending 2006. ( TA Sec reverses Intan stock to 'sell' )

Friday, January 27, 2006

GRANDIOSITY Some psychologists point to a human behavioral concept called grandiosity, as the primary cause of bull markets and bubbles. Grandiosity is a very strong belief in one’s greatness, abilities, knowledge, or character. One of the earliest stories of the danger inherent in grandiosity is from the Greek myth of Daedalus. Daedalus had built a labyrinth for Minos, the King of Crete, and when it was finished he wanted to return to his home in Greece. Because Daedalus was a useful engineer, King Minos refused to allow him to leave Crete.

King Minos controlled the sea, so Daedalus and his son Icarus could think of no other escape route from the island of Crete except by air. Therefore Daedalus used his great engineering skills to fabricate wings for himself and his young son Icarus out of feathers and wax and gave the whole gentle curvature a shape like the wings of a bird. When the father and son were prepared for the escape, Daedalus warned Icarus: Keep at a moderate height, for if you fly too low the damp will clog your wings, and if too high the heat will melt them.

As the two took flight, farmers and shepherds on the hillsides watched them in amazement, believing they must be gods. Suddenly the young Icarus, exulting in his new-found ability to fly, soared upward toward the heavens. The sun’s increasing heat began to soften the wax that kept his feathers in place and Icarus plunged helplessly into the sea and drowned. Daedalus arrived safely in Sicily, where he built a temple to Apollo and hung up his wings as an offering to the god.

This Greek myth, as is common in ancient tales, has a dual lesson for us. First, the obvious danger involved when one is overcome with feelings of grandiosity. But also, the amazing accomplishments that are possible when such grandiosity is applied within the confines of rational ambitions and ideals. When investors are hot and feel they can pick nothing but winners, they tend to be overcome with grandiosity--invincible, brilliant, unable to make a mistake. They no longer feel the need to consider risks and insist on a rational margin of safety after careful evaluation within their disciplined strategy. At that point, you can almost smell their portfolio holdings melting into a ball of soft wax!

Hopefully there will be times when you feel brilliant for making some timely decisive investment moves that reward you quickly and significantly. Resist the tendency towards grandiosity. Sun Tzu-style investors control such foolish emotions, always rationally facing the fact that 40% of all investment decisions are likely to produce average or sub-average results. In other words, stay humble and you’ll stay financially healthy.

I would really agree that more often that not it is very costly to our pockets and to our souls when one is too arrogant in the market.

Knowledge is power and being confident in one's own method is extremely important but there is a very fine line between being confident and being arrogant.

When one is arrogant, naturally one feels that one is Ze Special One.

And Ze Special One is simply special. One that can pick one winner after another. And Ze Special One makes no mistake, yes? And Ze Special One needs not much of margin of safety for they are simply SPECIAL.

Hmm....but can Ze Special One be so dead sure in the share market?

Is it even possible?

Let's be honest with ourselves. Take a good look at what we are. Are we really blessed with super powers to be so-called Special One? One who could pick winners after winners all the time? If we could, we wouldn't even be lurking around in message boards, forums or blogs. Face it.. we are just ze normal ones. Sometimes we can get good winners and sometimes we will make mistakes.

By staying humble, we will at least have a chance to recognise and acknowledge a mistake, if and when we do make a mistake. And when we do, it's utmost imperial that we correct our mistake(s) immediately and not hope and pray for the market to correct our mistake(s) for life is never always that kind to all of us.

Now if one is arrogant, would they ever admit that perhaps they were wrong in their stock selection?

And since they are not wrong, would they even consider cutting loss on a wrongly reasoned investment?

And since they are not wrong, would they even consider selling even though the market is proving them wrong and the stock's tumbling prices is also proving them wrong?

See the danger in such thinkings?

Me? I think it's always good to stay humble. I am just a normal bugger who can make mistakes! And when I do make the mistake(s), I will correct it ASAP! I won't let the market make a fool out of me and me moolah!

Thursday, January 26, 2006

It's previous day closing price was at 3.08.It's opening price was 2.30 (wow! Die standing!)It closed the day at 2.79.

Tell me.. if one had bought Intan because of this purcahse BJ Sports Toto share purchase, surely they would not be too pleased at what's happening. Perhaps that's an understaatement. Mighty angry would have been a better description. Yes?

Now OSK carried a write-up on this corporate issue.

And again, the issue is simple. For whom they are writing for? The Good? The Bad? or The Pretty(?)?

Here is what's written.

ConclusionThe Good - BTOTO. With the latest development, shareholders would be able to enjoy early capital repayment as the whole exercise is expected to be completed in the next 4-6 months vis-à-vis the original proposal whereby the whole deal is expected to finalise only by end-2006 as this can be implemented before the settlement of the inter-company loan. Maintain BUY on the stock with fair value tagged at RM5.20.The Bad - INTAN. The saga continues and Intan?s position has been put in a quandary. During an analysts? briefing management have alluded to that there are new plans for the company that will be announced shortly. NOT RATED

For me, I am one of the investing public, hence I need to speak for the rest of the market.

So, as one, as a minority investor of the Bursa Malaysia (err. me own not a share in this group), I felt that perhaps this corporate exercise has made a total mockery of Bursa Malaysia. (hey, this is a blog of my opinions, my mumblings, heck, if it wasn't, why should i bother, right?).

We have a share of a company which was struggling to make money, a company which saw its value tripled because of a proposal to make an inter-related transaction. And all of a sudden, the company said it was rescinding that transaction.

How?

As for OSK conclusion, i asked of a simple question. Does it even matter?

Yes, this is not a trick question but just how can you define value, how do you safely define which is good, which is bad, which is ugly when this group of company continues to flip-flop its corporate exercises?

That was when Intan Utilities proudly announced "I Do.." to the Malaysian stock market. In a corporate fund raising exercise, Intan told the world it was buying Berjaya Sports Toto shares from Berjaya Land in a 1.15 bil ringgit cash deal or 3.60 per share.

... BLand said that proceeds raised from the share sale in BToto will be used to repay bank borrowings as well as for partial repayment of an amount owed to BToto of 512 mln rgt.It added that upon completion of the proposed disposal, which is expected to be completed in six months, the company will still owe BToto about 189 mln rgt."

Though the board continues to believe in the long-term potential of BToto, the board has decided to undertake the proposed disposal as it allows BLand to realize the value of its investment in BToto for a cash consideration, which will be utilized to repay the amount owing to BToto and improve its gearing by repaying its bank borrowings," BLand said.

Isn't it simply incredible?(here is some interesting comments from another blogger on this isue: Bjland-Bjtoto-Intan)

Me?

I find it very strange that they can be doing such a corporate flip-flop.

What is even more strange was that Intan was hardly a profitable company when it made the initial announcement last June 2005.

And what is even more strange is the huge run-up in Intan stock price. From a stock that was trading in a trading range of 1.20-1.50, this stock saw a dramatic change in fortune. With the 3.60 offer, Intan instantly flew up, up and awayyyyyyyyyyyyyyy.

And I wonder... how many profited from the run-up in Intan's stock price?

And I wonder... if anyone from Intan Utilities took advantage of this run-up by disposing their shares?

And I wonder... if anyone will lose mega bucks from this sudden flip-flop? After all, there was an arbitrage opportunity to make money due to the price variance between the traded price and the offer price back in June 2005.

At the time of writing (June 1988), it may be premature to write the history of 1987Crash as the full story of this crash has not yet been revealed. (Aisehhhh... what la.... !!.. I told you this little book is OLD what!). However, the global stock market crash of Oct 1987 has become part of the folklore of the investment world and it would be negligent if this story is left out.In some ways, it is more difficult to get a 'handle' of this Crash than the two Crashes previously described. There were no obvious villains as in the earlier crashes. The bull market was intense and broad based, to be followed by a crash of unprecedented severity. The amazing thing to most casual observers of the market is that the crash took place just as both Msia's and Spore's economy were getting into full steam after two years of unprecedented low growth.

It is to be admitted that the economy of both countries were expected to do well in 1987/88 compared with the previous two years but the growth rate which has been achieved is low if compared with the heydays of say 1975 or 1981 when the economy grew at twice this rate or more. In spite of the mediocre economic rate, the stock market put up one of the best performances ever.

... It matched the growth rate of the bull market of 72/73 all the way.

From the start of bull market up to its peak, the SES All Shares nearly doubled while the KLSE increased by 167%. This is to be contrasted with an expected total growth in GNP of about 15% for 1987 and 1988. An examination of the earnings trend of the listed shares on both exchanges is even more telling. Apart from commodity companies and certain turnaround situations (eg Cycle & Carriage), the improvement in EPS between 1986 and 1987 is not particularly remarkable.The increase in the EPS between 1986 and 1987 is only 18.7% for the Sporean stocks and 34.6% for the Msian stocks. Their March 1986 PER (based on 1987 EPS to allow for the expected increase in EPS) at the start of the bull run were not particularly low by usual financial standards (respectively 13.8 and 21.9). At the peak of the bull run, their PER can be said to be very high indeed and probably not sustainable.

The experience of the non-blue chips more or less mirrored that of the blue chips except the former were more extreme in their movements. In spite of the none-too-low PER level of the majority of the stocks in March 1986, the market took off in the classical manner with an ever increasing rate of increase that is so typical of a speculative stock market boom. Readers may like to compare it with the rate of increase experienced in the previous two booms described earlier.

Thus by Sept 1987, many local stocks were selling at prices which were completely out of line with the fundamentals. [ same symptoms lo - prices went totally out of whack!! ] The earlier two tables in message 33 and 34 shows the PER of a selection of stocks at the top of the market compared with the highest PER during the previous bull markets. It is safe assumption that the shares do indeed look expensive compared with previous stock market tops.

Why should the market height it did, if there are no strong fundamental reasons to account for? (LOL!! No strong fundamental reasons? Kaki-kia?)

Influence of the Foreign markets

There is little doubt that the four years up to 1986 saw one of the best periods for stock markets worldwide. It is interesting to compare the performance of the various stock markets of the world between 1982 and 1983 to that of the local market.

.. the local market was the only one which had done badly in the four years preceding 1986. Furthermore, by Jan 1986, local bear market was 26 months old, a very advanced age for a bear market. Given the very powerful psychological stimulus provided by the continuing strong advances in most major markets, it is not surprising that local investors took heart and got the bull market underway.

Local commentators also attributed foreign buying ti giving the market further impetus. There is no doubt that there was some foreign buying although the exact quantity is unknown. A figure of US$2-3 billion has been cited by various commentators. This figure us quite small relative to the overall capitalisation if the market (US$50 billion, at the peak). However, given the poor liquidity of the local market, foreign buying could give quite a boost to the local prices.

Low Local Interest Rate

Due to a combination of factors, interest rate sank to a historically low level by early 1987. In Singapore, interest rate reached a peak in 1980, declined quite sharply in 1981 and held steady from 1982 to 1984. In 1985, interest rate in Singapore started to decline again, by early 1986 the three month fixed deposit rate was down to 4.5% and by early 1987 it was down to 2.85%.In Msia, the decline in interest rates was even more precipitous. The interest rate hit a peak in 1984 with the three month fixed deposit rate reaching 10.5%. The rate declined to 7.25% in 1985 and 6.25% by end of 1986 before diving down to 2.5% by mid 1987.( WOW!!! that's a sure DEEP falling rates!!!... and with such low interest rates... where to put ze moola??)In the face of interest rate being less than the average dividend yield of the stocks at the time, is not surprising that large amounts of money flowed into the stock market, thus driving up the prices.

Economic Recovery

For both countries, 1987 was an incredible turnaround year. Both countries achieved the highest growth in five years. The improving economy meant higher income for the people. Even more than that, the psychological impact of a good year after two dismal ones must have been very great. Everyone must have felt as if a great weight had been lifted off their shoulders and the general cheerfulness and good feeling may have contributed to a great deal of optimism about the market.

Lack of Other Investment Avenues.

The lack of other avenues of investment is an important factor for a stock market to boom to reach speculative proportion. In 1986/87, this condition was fully met. The only other investment alternative apart from stocks and deposits, for laymen was in houses.By 1986, the housing market in both countries was in a severe slump.What is worse, the slump did not look as if it was going to end soon. There was therefore totally no incentive for investing in homes.

Granted that there were good reasons for going into the share market, it is understandable that the market should have gone up. But what is not comprehensive is that why should the market go up so much especially for the Malaysian stocks.

I feel that once again, the local stock market players had let their emotions take over from their senses. A more charitable interpretation would be that the typical investor still did not have an understanding of investment fundamentals such as PER and DY. In this sense, they were no better than the players of the previous speculative booms. Once the market went up strongly, they would enter the market, attracted not by the value represented by the shares but by the mere fact that they have gone up so much. The market went into a self-sustaining upward spiral.(LOL!!!... kaki-kia dude!!!)

...(As we can see from the tables in the book)the PER(most of them 3 digits PER some had PER over 230!! and most had NM (not meaningful) PER cos they were companies which were losing money!)were typically so high that prices could not be sustained once the reasons for the rise in the first place disappeared.

Thus, once the collapse hit the other markets, the interest in local market largely vapourised as well and the market took a plunge of unprecedented short term severity.

The tables (in the book)shows the magnitude of the fall amongst a selection of speculative and investment grade shares. Once again, the volatility of the local market was clearly demonstrated.Even though our market started moving up much, much later than the major markets, our decline was more severe than any of these except hong Kong. Latecomers to the speculative scene once again must have suffered enormous losses. (err... buy high, sell ... ???)Conclusion.

These three adventures to Manialand have shown all too clearly that local investors are still far from rational in their approach to investment. Their behaviour in 1987 was not much improved from that of 1973.If anything, what can be noted is a very disturbing development, the local market seems to have become more speculative not less. (Ahemmm... now? any changes? ...how? ) The first truly speculative boom of modern time took place in 71/72 and there was a gap of over 8 years before the next speculative boom (that of 80/81) took place. But after the boom of 80/81, there were 2 more episodes of speculation within a space of seven years.

An even more disturbing fact is that the local market has not effectively progressed since 80/81. Between 70 and 80, the local market gained about 400%. But from 80/81 to 87/88, the market hardly moved at all. What this means is that had an investor bought near the top of the market in 1973, he would have bought in at the top of the market in 1981, many would still be out of money today.

Wednesday, January 25, 2006

There's this old little book by Neoh Soon Kean called Stock Market Investment in Malaysia and Singapore. It's published under Berita Publishing SdnBhd.

Here are some collection of comments from the book which I find to be very interesting.

from pg 14...

It is always difficult to determine exactly when a bull run starts, certainly much more difficult than pin-pointing the time a crash starts. Typically, a bull run always starts gently. The prices tend to bump along the bottom for a while before starting up and even after it has started, there may be a few false starts when the rate of rise would falter. With that caveat in mind, it is my opinion that the bull run started in Jan 1971 and the big marker break (that is the start of the crash) occured on 13 Feb 1973, an up-cycle period of about two years.....

The amazing fact is that in 1971 and 1972 could be regarded as bad years economically for Malaysia while 1973 and 1974 were, in fact very good years for both Msia and Singapore. Yet the latter two years coincided with the sharpest fall in the history of Msian/S'porean stock market. STi fell by 41% in 1973 and 42% in 1974.

Until after June 1973, the Malaysian stock market and the Singapore stock market were joint. The whole market was therefore affected by the economic well being of Malaysia. In the early 1970's Msia/S'pore was still very much an export-oriented region. The prosperity of many quoted co's in the stock market was much dependent on the export of primary commodities.What were some of the factors which caused the big boom?

(1) Early profit was made after May 13th incident of 1969, investors' confidence sank to an extremely low ebb. there was a very considerable amount of panic selling and the Straits Time Industrial Index dropped to a low of 130 in late 1970 from 170 in April 1969. Many shares were being sold at an extremely low level. The few investors who had the courage to buy then were to make hefty gains later on.... even after another more than 40% rise in the overall price level by 31 Dec 1971, many of the stocks, were still very reasonable, especially the second tier stocks.The early profits attracted a lot of investors into the market and again, the prices rose and by June 1972, ST had increased by another 20%. However from this point onwards, the people entering the markets were no longer governed by economic considerations.

The prices were to be increased by yet another 81% in the next six months (WAAAHHH),after which the end of the boom was in sight. By that time, the market had caught the speculative fever and price rises were no longer rational. The market was to rise another 41% in the final six weeks before collapsing. It is notable that the increase every six months got steeper and steeper. In the final three months or so, the increase of the index exceeded that of the previous 2 years! This rate of increase obviously cannot be sustained and the speculative mania ran out of steam and had nowhere to go but down.

... When a market is rising, everyone who goes in makes some profit and he is therefor encouraged to make further purchases. However, the continuous price increase cannot go on forever. At some point of time, the amount of money tied up is so high (at the highs, one lot of OCBC costs 50,000, a sum which was more than the selling price of two terrace houses at that point of time) (Fiyoh!!!! Now that's what u call BULL, eh?)that the buyer who buys in anticipation of a further rise will be forced to sell soon if the market is not going up. Once the market sees that a shares has stopped rising, the opposite goes into effect. The intending buyer will delay buying hoping that the price will fall further. This causes the weak intending seller to lower his price yet again. A spiral of forced selling at low prices is thus started and it tends to continue at ever increasing speed until eventually much, if not all, of the earlier rise is completely increased.(2) Many were First Time InvestorsFor much of the 1960s, investment in the local share market was very much limited to the institutions, large corporation and a few well-off private individuals. The middle class was of a small number and wielded little economic power. However, with the Independence in M'sia and Singapore, the social spending of the governments were vastly increased and slowly a large body of middle class consisting of civil servants, doctors, teachers and other professionals were established.

Like the US of the 1920's investment opportunities in the late 1960's were the limited. Three months of fixed deposit was then paying 5% (Wahh... 5% now banyak lo). Naturally the stock market market attracted some of the money in circulation. As explained before, those who made profit early, attracted many others into the fold. The commentators of the time also pointed out an additional fact which caused a large number of first timers into the market. In late 1972, all teachers in msia received a considerable amount of back pay. The sudden receipt of an unexpected sum of money and the booming stock market at that time was all that needed to push many teachers into the market. Indeed in 1972, teachers' common room conversation was largely limited to the stock market. (LOL!!!! Wahh... so much happening inside ze teacher's in common room!!!... hohoho... playing shares when they are free??? )

These first timers had little idea of the economic principles upon which stock purchases should be made. Instead they relied on market talks, brokers' advice and self-proclaimed experts. (hehe... they become Sayurlor or some prefers to call it as Hong Kong Kai Lan) As a well-known Wall Street saying goes: 'Genius is a rising market'. the rapidly increasing prices gave all involved a vision of boundless prosperity and wealth ( hmmm... Grandiosity lo ). By the end of 1972, price rose to a level which could not be justified by any known economic standard.... the price increase obtained were totally out of bounds of rationality. A PER of three digits is absurd by any standard but to the newcomers, PER was a meaningless measure. All they believed was that: 'If the prices had doubled in the past 6 months, they must be capable of doubling yet again in the next six months'. (ho ho ho... they believed that the stocks could really fly up, up and awayyyyyyyyhor!!... and today's high is tomorrow's loweh?)(3) Rapidly Rising Foreign markets

(4) Trust in 'Blue Chips'

(hmmm.... is this where the common advise to buy blue chips come from?)

In the Crash of 1973, the top tier company was made much of finance, properties and a few old line companies such as Sime Darby and Haw Par. The enthusiasm for these top tier stocks was such that most others were largely ignored. The PER of the favoured stocks would rise to an astronomical level while for the less favoured, their PER would remain at a reasonable level even at the height of the speculative mania. The over-concentration of interest in a specific class of stocks naturally meant that the price rise would be even more phenomenal. Unfortunately, when the crash came, all stocks, favourites or otherwise, were brought down. Stock market crashes knew no favourites.

The higher the stocks rose, the worse they fell. Many ex-market favourites lost over 90% of their peak price. Local newspapers reported many cases of bankruptcies and several cases of suicides directly attributed to the stock market collapse.

But stop it did as it must in all slumps. The severe losses that took place traumatised the speculators for many years. When the overseas market picked up in 1975, the Msian/Sporean market failed to do so decisively. The prices bumped along the bottom for many years until 1979. At the time, once again the lessons of history appeared to have been forgotten and Msian/Sporeans indulged in yet another speculative orgy......

The Crash of 1981

In magnitude, it is almost as severe as the first Crash.

First, it would appear that there were sound economic reasons behind the rise of share prices this time. M'sian/Sporeans had learnt sufficiently to depend on their own feelings on how the economy was doing rather than rely on foreign indices. (Ahhh... the problem of de-coupling our own market from others... be independant lo) At the time of the beginning of the bull run (approx Jan 1979), both Dow Jones and Financial Time Indices were in the doldrums. The local economic environment at the beginning of 1979 was vastly better than that of 1970.

(the tables in the book.... showed that price of rubber went from 1.99 to 3.25, price of tin went from 18,736 per ton to 35,710 and CPO went from 882 to 1177).... commodity prices were approaching or just below their respective all time high. Most of the companies directly or indirectly involved in the commodities business were doing extremely well and were flush with cash.

... per capital GNP had been rising most steadily for five years at an average of about 15 per cent. More than that, the private sector was very liquid with cash. In 1979, the money supply of Msia was standing at a figure that was five times higher than in 1971!

With profit increasing at a rapid rate, a PER of 20 or more seemed fully justifiable. (yeah... look at Cycle... price went from 2.62 to 5.25, and yet the PER only increased from 10 to 13... there is growth!!) As the memory of 1973 faded away and the mood of the country totally changed (market sentiments lo), stocks were once more respectable investments. Thus, more and more Msian/Sporeans invested and saw their investments steadily increased in value...

Secondly, the timing was right this time. In 1978-1980 the economic horizon was bright and it was natural to envisage an extended period of prosperity. Indeed the governments did promise just that. It is natural to bid up the price of stocks at the top of an economic cycle and until mid-1980, the prices of most stocks were very reasonable. Not many people, if any, could have foreseen the recession of 1982 (two years away still)

Thirdly one could detect several signs of market efficiency which was most surprising in view of what happened in 1973. Even at the height of the speculation some shares were being quoted at very reasonable prices. At the maximum level Bata, C&C, SInHengCHan and many others could be bought at a PER of less than 20. Given the Msian/Sporean context, the PER reached could be considered rational. Purchases even at those prices would not have been unwise investments if the region's growth rate of the late 1970's were to continue into the 1980's. Furthermore, it is noticeable that many of the plantation and tin mine stocks turned down well in advance of the general market. Many plantation stocks peaked in 1981 and most tin stocks even earlier on. This can be shown by comparing the KLSE Industrial Index with the prices of popular plantation and tin stocks. Considering that the poor corporate reports were not to be published for yet another year, this was a very creditable performance. A considerable number of investors must have taken note of the softening price trends of rubber, cocoa and tin at the point of time and started to liquidate or reduce their holdings.

It must be stressed, however, that despite these pockets of efficiency by late 1980's, the usual symptoms of a speculative mania were making their appearance. Trading on the stock market became more and more widespread among the populace. The mania was slowing taking hold in the minds of the people and soon many of them would throw rationality to the wind.

By early 1981, the mania had once again reached epic proportion. The prices again showed the accelerating rate of increase that is common to all manias.

Once again, a large number of ignorant and inexperienced people were attracted to the stock market. Remisers set up operations in every small town and did roaring business. In a typical small town like TelukIntan, butchers, rubber merchants and small holders from the surrounding areas would crowd into town in the afternoon to take part in the rush to buy and sell shares. Even the universities were not immune to the temptation of the market. Many lecturers from each of the local universities were heavily involved. Housewives of all ages spent their days at the brokers' offices, no doubt finding it more exciting than a game of mahjong.(LMAO!!!..... hohoho.... mania!! Err.... Lecturers involved again? Soooo does this mean that these buggers are great BULL indicators???..... and kakaka.... if 2nd Auntie is so busy playing mahjong.. then u know stock market ain't too happening hor!!! )The Conglomerate Game... the value a speculator places on a stock (or a tulip) does not necessary depend on anything which is tangible. Rather, it depends on the image or fantasy the investor may have on a particular stock. A company that is continuously in the public eye ( a result of a continuous stream of announcements of bonus, rights, takeovers and profit forecasts, etc.) is that much more likely to become the object of such fantasy. ( Aha!!... got fancy CREATIVE story to sell??) In the same way, an actress who is always in the news is far more likely to become the object of a man's fantasy. Stocks of such companies are far more 'attractive' (sexy stocks?) and are more likely to be bidded up to a far higher level than the dull 'never-anything-happens' type of stocks.

... Indeed the activities of several companies during 1980 and 1981 fit the description. they are the companies that were busily engaging in takeovers and mergers ( for example, MUIB, HongLeong Industries and PEGI). With the announcement of each new takeover, their profit forecast would become greater and their prices attain a higher level. It would be indeed be foolish for these companies not to make use of their new found strength in the form of high stock prices to seek new takeovers by an exchange of shares. More takeovers led their prices to go even higher and an upward spiral took shape. What was realised by the public did not necessary mean higher per share earnings. This is because a lot of new shares had to be created to 'pay' for the takeovers.(ze dilutions effect lo!!!... BE WARNED! ) Therefore, the per share price should not necessarily go up between overall and per share share earnings was lost in the general madness to pursue high-flyers. Most of the newly-fledged conglomerates saw their stock price increase to a level that is ridiculous by any measure.

The Property Injection Game

Owing to various government and institutional obstacles, it has become increasingly difficult for a Malaysian company to become publicly listed. (Oh my, how times have changed!) For the five years prior to 1981, only a handful of new companies each year had reached such exalted rank. This naturally resulted in a great deal of impatience among entrepreneurs who were anxious to have access to the public capital market. Over the previous four or five years, this impatience had manifested itself in the form of an increasing number of entrepreneurs buying over control of a listed company and injecting his own properties into the listed company as a way of achieving public listing. Since taking over a successful company is not cheap, these entrepreneurs naturally turned their attention to less successful companies ( yalor - the lousy ones - ones that wud stretch and bend ze rules sikit!! ) , in particular, textile companies which were going thru a poor earning stretch.

... On taking over a moribound or semi-moribound listed company, the entrepreneur would use it to takeover their existing assets by a process which is locally known as 'injection'. Most of these assets being so injected had been real properties (ie pieces of land). To the local share buying public, real estate had a magical ring to it for did we all not know that: "All real real-estate developers are rolling in money?" Given this fantasy image of real-estate development, every time the re-organisation of a moribound listed company into a real properties development company was announced, the public went wild bidding up the price of the previously moribound or semi-moribound company to incredible heights. Not only was there an enormous enthusiasm for companies actually being re-organised this way, the speculation spilled over the companies which might be taken over.

This when Taiping Textile was being reorganised the stocks of South Pacific textile, Imatex and Textile Corporation all went up in sympathy even though there were NO concrete news. As mentioned earlier, since the 'Property injectors', were only interested in moribound or semi-moribound companies, we have the most curious phenomenon whereby stocks of companies which would normally be considered as not particularly good, were bidded to an unjustifiable level even for a good company.(The Goreng of the Chekai and Lousy stocks????)The End is Near

Thus, if one were to refer to a list of most active stocks for the two years before the Crash of 1981, one would see that much of the activities centred around either conglomerates or re-organised companies or companies rumoured to be facing re-organisation. The day of reckoning arrived when the prices were bidded up to a ridiculously high level and when weak holders become anxious. Like in all slumps, once nervousness started to appear, confidence rapidly ebbed since it was not based on anything tangible in the first place. The market peaked on 26 june 1981, and lost rapidly almost HALF of its value within the next four months. there were a few anaemic attempts atrallying which all failed to go very high. This went on for about eight mnoths. In late July 1982, stock prices began to drop again, slowly at first and then sharply to result in a market loss of another 100 points.( .... hmmm.... the dangers of using of year high and year low as an indicator to buy stocks lor ... cause .... if one used such indicator as a guide.... surely KENA big, big time lo .... so think it is wise to use a contrarian approach to buy a stock based on low prices?)There is an ironical twist in the end of the story if the Crash of 1981. The market went down rapidly from a high of 823 on the KLSE to reach a low of 364 after fourteen months. This means a decline of about 58% in just over an year, a very rapid fall by any standard. One would expect it to continue falling further and stay down for a while to catch its breath as in most speculative collapses. This however, did not take place as the local speculators did not seem to have suffered enough and the market started moving up again toward the end of 1982 and was to reach a very high level of 680 by Feb 1984. Most local speculators were ecstatic over the unexpected rise and most local stock market commentators were expecting renewed climb to new heights for 1984. Once again, the unexpected happened and 1984 turned out to be another bad year for local speculators.

( Ahemmm.... never seem to learn their lessons, eh?? )to be continued.... The Crash of 87!

Datuk Amanullah Mohamed Yusoof, who is a non-independent, non-executive director of the company, is currently the majority shareholder with 28% equity or 12.1 million shares in AV Ventures. He is believed to be looking to cash out of AV Ventures to focus on his oil and gas business currently held under a private company Pivotal Achievement Sdn Bhd. BizWeek was told that several parties have expressed interest to take up his stake in the company, one of whom includesTan Sri Syed Mokhtar Albukhary. Told by several parties? And the author of this blatant creative piece threw in a star corporate name to spice up the article. Now as expected, AV Ventures announced yesterday that there was some parties sounding interest BUT it states clearly that Tan Sri Syed Mokhtar had NOT expressed any interest.

So tell me.. how can the reporter write like that? Where's the integrity in his reporting?

Here is the link to AV Ventures announcement yesterday:Click here Question 1 Dato' Amanullah Bin Mohamed Yusoof confirmed that he is not looking to cash out of AV Ventures. However, as an entrepreneur, Dato' Amanullah may be open to any offers which may benefit the shareholders of AV Ventures.

Question 2 Dato' Amanullah has confirmed that several parties have expressed interest to take up his stake in the Company, but did not receive any offer from Tan Sri Syed Mokhtar Albukhary.

Question 3 Dato' Amanullah confirmed that Tan Sri Syed Mokhtar Albukhary did not make any offer.

Syed Mokhtar’s interest in AV Ventures, which manufactures automobile parts, such as wiper arms, car window regulators, horns and other parts for the auto industry, it seems stems from his shareholding in another automotive player, conglomerate DRB-HICOM Bhd in which he acquired 15.8% equity last year. The tycoon is believed to have sent his feelers out and made an offer to Amanullah via merchant bankers CIMB Bhd, offering RM1.20 a share, which works out to a total of about RM14.5mil for Amanullah’s shares.The RM1.20 per share offer is a steep premium to AV Ventures close of 66 sen on Thursday and its net tangible asset peer share which at end September stood at 27.5 sen.

It is still not clear what Syed Mokhtar has planned for AV Ventures, but an analyst says he may be looking to inject his equity in AV Ventures and other existing motor related businesses for additional shares in conglomerate, DRB-HICOM.

There is also a possibility that Syed Mokhtar who also controls MCIS Safety Glass Sdn Bhd, which manufactures windshields and Mardec Bhd, which is largely involved in tyre manufacturing may rope in all his auto related businesses to strengthen his shareholding in DRB-HICOM.

DRB-HICOM’s as part of its sprawling automotive empire has a 34% stake in Honda Malaysia Sdn Bhd, which manufactures, assembles and distributes Honda vehicles in Malaysia and some other parts of Asean.An analyst from Mayban Securities says the acquisition by Syed Mokhtar and the subsequent injection into DRB-HICOM may be due to more assembly work inked by the auto giant DRB-HICOM. There have been rumours that DRB-HICOM may look to assemble Chevrolet marques for the Malaysian market.

The conglomerate also directly distributes or has a hand in the distribution of several other marques, via its 29.3% unit Edaran Otomobil Nasional Bhd, which distributes marques such as Audi, TD 2000, Mitsubishi and Tata vehicles among others.

Look at the above paragraphs. Littered with phrases such as is believed, a possibility, have been rumours.

So if there was no offer made, then what about the above statements? A fragment of imagination from the reporter?

Don't you find it strange that we have such quality reporters reporting?

Up until June last year, AV Ventures controlled only as much as 51.7% of Autoventure Mando, but has since acquired 8.3% equity from Tengku Malek Tengku Mohamed and another 10% from Bank Islam Malaysia Bhd, collectively for about RM1.5mil.

See how the reporter tries to SELL and PROMOTE the company by insinuating that there is a jewel somewhere in AV Ventures?

The company turned the corner in FY04, but has been posting paltry earnings.

For the nine months ended September, AV Ventures posted a net profit of RM201,000 on the back of RM33.8mil in sales. For the third quarter of FY05, AV Ventures made a net loss of RM67,000 on RM10.2mil in revenue.

As at end September, the company’s current assets stood at about RM26mil with cash and cash equivalents of some RM8.3mil, while its current liabilities stood at about RM20.1mil.

LOL!

Yup, Av Ventures indeed has been paltry.

But... to be even more precise ... AV Ventures made losses for its most recent 2 quarters.

So what do we have?

We have a below average company which lost money for its most recent 2 quarters and whose stock price was drifting lower and lower in the market. And out of the blue, the starCREATIVE reporter decided to do a creative article, throwing in aSPECULATION that a star corporate player MIGHT BE interesting in buying a stake.

How? When our financial press is turned into such a circus, what's left of our financial news?

Err... doesn't it turn it into a funnycial press?

Now take a look at the trading pattern b4 the news was published on Saturday, Jan 21st 2006

Tuesday, January 24, 2006

When you say, "I can't sell my stock because I don't want to take a loss," you assume that what you want has some bearing on the situation. But the stock doesn't know who you are, and it couldn't care less what you hope or want.

Besides, selling doesn't give you the loss; you already have the loss.

If you think a loss isn't incurred until you sell the stock, you're kidding yourself.

The larger the paper loss, the more real it will become.

For eg, if you had paid $40 per share for 100 shares of Buggers United, and it's now worth $28 per share, you have $2800 of that lousy good for nothing Buggers United that cost you $4000. You have a $1200 loss. Whether you convert the stock into cash or hold it, it's still worth only $2800.

Even though you didn't sell, you took your looss as the stock dropped in price. You'd be better off selling and going back to a cash position where you can think far more objectively.

When you're holding on to a big loss, you are rarely able to think straight; you rationalize and say, "It can't go any lower."

However, keep in mind that there are many other stocks to choose from where your chance of recouping your loss could be greater.

Here's another suggestion that may help you decide whether to sell:

Pretend you don't own the stock and you have $2800 in the bank.

Then ask yourself, "Do I really want to buy this Buggers United stock now?"

If your answer is no... then why are you holding on to the stock?

How true isn't it?

A loss is a loss is a loss.

In the share market, folks who hang on to their losses is an a self-denial state. They are simply wishing and hoping and praying that a market bull will occur and help them recover their losses.

Is this really rational thinking?

I know personally folks who are holding on the stocks that they bought at rm10.00 but trades at a miserable 1.00 or so. "Why aren't you selling?", I asked. "It's alright since its paid for, so I will wait for the next bull run!" was the answer I got. Well, it's probably about a good 10 years ago!

Rational thinking or plain silly thinking.

Now I wonder, if a dire emergency really happened, would she be willing to finally accept the loss and cash out on her mistake?

Monday, January 23, 2006

January 29, 2006. On that day, it will be the new Chinese New Year. The Year of the Dog.

Hence, I thought it would appropriate if i bring up this delightful investment piece from the book, Sun Tzu on Investing.

There’s an old Chinese story about an Emperor and his pet dog. The Emperor awoke one day when he heard a loud noise. From his bedroom window he could see a large ox-drawn cart had run into a wooden flagpole used to raise the Emperor’s family crest high above the castle. The flagpole was ever so slightly tilted, but the damage appeared minimal and no repair work was initiated. Later that day, the Emperor was walking his dog past the flagpole and the dog stopped to, well, to do what dog’s do to flagpoles. Suddenly, with a loud snap the pole crashed down onto the poor dog before he could even lower his raised hind leg, killing him instantly.

What the Emperor and his attendants couldn’t see was damage hidden below the surface. The flagpole had leaned ever so slightly, but it was enough to cause a critical break in the structure just below ground level. Obviously, the dog got the raw end of this whole deal. But let us pose a simple question: If you were trying to assess blame for unnecessary risks in this situation, where would you place it?

You could blame the workers employed by the Emperor to erect a flagpole for choosing a pole with a weak spot and concealing it below the ground. Or you could blame the Emperor, although it may cost you your life, for his vanity in demanding such a tall flagpole to fly his family crest above the castle. Maybe the fault was with the deliveryman who carelessly backed his ox cart into the pole causing the imminent damage. We could also blame the dog for marking too wide a territory! The story illustrates how difficult it can be to assess where risk originates. To the dog it mattered not how or why it happened, or even to who the blame should be assessed--just the fact that it happened.

When it comes to equity investing, you are the dog. If there are risks being taken by companies you hold, you are the one who will suffer the most direct damage. That’s the cold, hard truth. The thing is, those who are taking the risks may not recognize them as such, or may be purposefully concealing them from you. All the more reason for you to be extremely careful in selecting the companies you choose to invest in, and the integrity of the managers.

Enron Corp, a leading Houston, Texas-based global energy giant employing over 6,000 people was dramatically exposed during 2002 as its executives and its professional consultants had been going to great lengths to hide some of the risks that the company was assuming from its shareholders. But even without their efforts to cover their trail of secret off-balance-sheet high-risk investments, one would guess that 99% of the people who bought Enron stock never attempted to sort through Enron’s financial footnotes searching for risks. Had they done so, they would probably not have identified the key risks, as even some of the smartest accounting minds in the world have disclosed that Enron had been a black box--i.e. a complete mystery to them. But the point is that millions of intelligent shareholders (including a good number of global professional fund managers) accepted the blue-chip status of this massive business without performing any due diligence tests, they accepted broker advice and analyst buy recommendations, when the sad reality was (despite audited financial reports to the contrary) that the company was literally on the verge of financial collapse.

We are never going to have all of the information necessary to assess all the risks inherent in equity investments. Despite moves to improve corporate transparency, companies are under no obligation to reveal their internal operations to outside investors. To do so would require making some sensitive information public when good business acumen dictates keeping it as a secret to preserve competitive advantages. However, we are each obligated to at least consider potential risks and ask the right questions. If not, like the Emperor’s dog, we are sure to eventually be crushed under the weight of our own ignorance.

Investing is all about risk. The more risk you take, the higher your potential returns. And this is all correct, except for the fact that it is exactly wrong.Investing is all about perceived risk. Where you as an investor have an advantage is only in situations where you can correctly assess that the market has overestimated (or underestimated) future risks or returns. That requires foreknowledge. Remember Sun Tzu’s words, Foreknowledge cannot be gotten from ghosts and spirits, cannot be had by analogy, cannot be found out by calculation. It must be obtained from people, people who know the conditions of the enemy.

Foreknowledge only comes from asking the right questions of the right people. Occasionally, we all miss a key piece of information and suffer an unexpected loss on an investment. These situations can be minimized by investors who refuse to accept broker and analyst opinions at face value, insist on asking their own questions of management, analyze a company’s financial footnotes on their own, and purposefully list every possible downside risk involved in a business--even a business they have already invested in and consider a favorite holding. The most difficult risk to assess is the risk of a negative unexpected event affecting one of your favorite stocks, the very stock you have been buying and recommending to all your friends.

A truly excellent piece.

What is most interesting about the write-up is the very last statement.

The most difficult risk to assess is the risk of a negative unexpected event affecting one of your favorite stocks, the very stock you have been buying and recommending to all your friends.

How?

Your Favorite stock, the very one that you have been banking on, the one that you recommend to all your friends, has a serious flaw stemming from a negative unexpected event.

How?

What are you going do about it?

Are you going to accept that your investment is very likely to go bad, accept the defeat and move on?

Or are you going to continue digging in the hole that you found yourself in?

In a contrarian investment strategy,the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.

Now based on Fama and French theory, we now have a stock which had a 3 month high of around 1.08 and a 12 month high of around 1.40.

Price of Megan Media is now 62 sen. Would one be influenced just because of the low price to adopt a contrarian investing approach on Megan?

Let's see, Megan has performed poorly and fallen out of favor. (Dun have the the previous 2 year highs ler.. )

Soo... would one consider Megan Media as a candidate under this contrarian theory approach?

If so... let's put a marker at 62 sen.. and do a reveiw on it ... maybe a year later?

Now compare the other contrarian approach. The selective contrarian approach.

A selective contrarian investment strategy– Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Simple issue. Does Megan Media, currently specialising in DVD discs, have a durable competitve advantage?

My answer as per previous blog posts is a simple NO.

Margins have been poor all along and the balance sheet issues has given a clear indication that there is a very strong likelyhood for Megan Media to struggle.

So there is absolutely no reason why to buy whatsoever if one adopts the selective contrarian investing approach.

Btw..

Commonsense thingy...

A stock that is beaten down. Why? Stock lousy mah.

So does betting it based on this factor make sense?

Or put it this way.. why should the stock, Megan, rebound?

Doesn't it need a really strong set of earnings and clear sign of improvement in its balance sheet issues?

Without this two issues being solved, what will be ze catalyst to attract and seduce buyers to buy the stock?

Unless of course, one believes in the Kaki-Kia (have you heard the hokien KIA joke before? if no, feel free to click on the comments to this blog entry!) theory in stock!(ho ho ho ho!!!)Oh... another commonsense thingy...

Now.. u see a hugely popular recommended stock in a stock message board gets beaten down teruk-teruk.. and instead of seeing the so-called advicer admitting their own faults in their recommendation(s)(simple issue mah, all of us are merely human and we all do make mistakes. Admitting and owning up to the mistake is the right thingy to do, isn't it?), the advicer twist and turns and stubbornly admits that their stock picking is spot on.

How?

How would one evaluate such a situation?

For example, using our commonsense thingy, doesn't it kinda get rather really silly when one shouts M a buy at 1.40, M still a buy at 1.20, M a buy at 0.80, M still a buy at 0.60 and so on and so on..

Why not admit the mistake and move on?

Why drag on?

Ahh.. perhaps... the advicer knows only the theory but cannot excute the theory of correcting their mistakes when they are wrong(ze theory: a good coach does not necessary equate to a good player and vice-versa! Meaning sometimes people cannot practice what they preach!). So what do they do? They continue to shout out loud-loud a buy for long term, contrarian investing and so on and so on, twisting and turning, all becuase of their own vested interest!

Think about it... The bugger has the stock and the bugger has no heart and simply do not know how to cut-loss and correct their mistakes. So what do they do? They continue digging a bigger hole.

Also think about it.. would the bugger admit the fault in the stock selection when the bugger still have vested interest in it?

Also think about it... if that is all true.. then isn't it logical why the bugger continues to advice a buy on it?

How?

ps... me just mumbling and bumbling hor.... and oh... i am still thinking about it!

Sunday, January 22, 2006

Contratian Investing is a method of moving against the crowd, which relies heavily on a broad understanding of investor pyschology, and when done successfully, you will appear to have seen the future. Sun Tzu advised his generals to devise strategues that deceived their opponents, wore them out, and put them at natural disadvantages. Rational investors will have a natural advantage during time of excessive bull market optimism and bear market pessimism. The key to recognizing such dangers and opportunities is to remain loyal to your Sun Tzu-style assessments, continue screening stocks one at a time and remain focused on determined business value. Your discipline will help you avoid paying too much during bull markets and enhance your confidence to buy bargains during bear markets. You will become a rational contrarian and your peers will think you have seen the future (or lost your mind). Contratian Investing is one of those terms often misunderstood.A contrarian investor doesn't move against the popular crowd simply for the sake of being different. The true contrarian is a strategic investor whose disciplined approach to stock selection is often at odds with the current trend. If you stick to any particular investing style, be it based on low asset valuations, high earnings growth rates, or high dividend yields, there will be period of times when your style will be in line with the popular thinking, and other times when it will run contrary to the style of the day.

The more long-term focused your strategy, the more likely it will be at odds with popular market trends. Contrasting styles of investing often result from investors' perspectives of the stock market. Chartists, technical analysts and speculators are looking at the short term price movement patterns in the hope they can glean some sense of a trend, able to predict what other investors are thinking. They are trying to understand the emotions of other investors and profit by anticipating their next move. As their guessing game becomes more sophisticatedm and everyone is observing the same charts - the professional guessers must now predict how the other predictors are guessing about how emotions of the majority investors will affect short-term price movements - this quickly becomes a frustrating guess-what-the-guessers-are-guessing game with no likely winners.

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years. This strategy focuses on falling stock prices and pays little mind to the underlying economics of the companies. With the traditional contrarian investment strategy investors don’t discriminate between price-competitive-type businesses and companies that possess a durable competitive advantage. So long as the share price has recently fallen, the stock is a candidate for purchase. A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

~~~~~~~~~~~~~~~~~~

In a contrarian investment strategy, the investor buys stocks that have recently performed poorly and have fallen out of favor with investors. This strategy is based on the stock research of Eugene Fama and Kenneth French, who figured out that buying companies that have had their stock prices beaten down in the two previous years are likely to give investors an above-average return over the next two years.As you are very well aware that the market is full of risks. And the success of an investor or even a trader depends on how well they acknowledge and manage their risk.

Let me give u some of my views. Not sure u would agree... but here goes...

So firstly i would try to understand the theory.

The main assumptionin this strategy is that all beated down stocks will one day rise again.

Which basically saying is that all stock price movements are cyclical. Stocks will have their up and their down days.

So where could one go wrong?

1.How safe is our purchase price?What if the beaten down stock gets more beaten? Or simply put... is it time to buy now?

2.Yes, in general ... most stocks that get beaten down... will rise again... but what if it rebound does not past my purchase price? Meaning will the recovery be worthwhile?Will it be profitable?

3.What if the stock i chose in the beaten down industry does not rise?

4.What if shit happens? Beaten down stock gets beaten down because it is so poor fundamenetally. And the real danger is what if it turns into a real disaster? yup... what if the stock really goes DOWN under?

5. How long would it take for this recovery to happen? Say if we buy the stock now.. seeing that the stock price is beaten down... what if this recovery takes much longer than we expected? Will the stock price hold?

Well these are the questions i think that require much thinking. In fact, me myself, cannot give you a logical answer to all of it because the bottom line is that the answers to the questions is itself unpredictable.

Which is why... in my opinion... what Mary Buffett wrote in her book, The New Buffettology , about her ex-father-in-law is a rather more useful approach.

A selective contrarian investment strategy – Warren’s approach – dictates that investors buy shares only when a company has a durable competitive advantage, and only when its stock price has been beaten down by a shortsighted market, to the extent that it makes business sense to purchase the entire market. This strategy differs from the traditional contrarian investment strategy in that it targets specific companies that have an identifiable strategy in that it targets specific companies that have an identifiable durable competitive advantage over their competitors and are selling at a price that a private business owner would find attractive.

Which basically means that the beaten down stocks must represents companies which has a durable competitive advantage.

Companies that are of good quality.

This, i believe will help the investor safeguard themselves versus the issues that i had written earlier.

"For practical purposes," Galbraith wrote, "the financial memory should be assumed to last, at maximum, no more than twenty years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to come on the scene, impressed, as had been its predecessors, with its own innovative genius." (pg 87 of Galbraith's book)

During the period of delirious forgetfulness, no one wishes to think that his good fortune is fortuitous or undeserved. Everyone prefers to be believe that it is the result of its own superior insight into the market.

No wonder, then, that during such periods, doubters are silenced.

Very interesting comment isn't it? When the market is good, everyone thinks they are good!

By 1999, Byron Wien, Morgan Stanley chief domestic strategist, recalled one scene when an analyst stood in his office recommending a stock that was selling at over 100 times earnings. "How do you arrive at your valuation?" Wien asked. "Show me the parameters you'r using." The young analyst just stared at the 64-year-old market strategist.

"When you're an older person, and you'r cautious, while the market is still going up, you're perceived as out of touch," Wien later recalled. "You just think that a stock is worth $20; you say that, at $30, it's overbought; then it goes to $40. You can begin to doubt yourself."

But Wien had a corner office with its skyscraper views of Manhattan. The young man standing in the middle of the carpet did not. More important, he did not have the thick skin that comes with trying to outguess the market while working your way up to such an office at Morgan Stanley. If Wien doubted himself, he did not show it. He waited for the answer. "The stock is worth what someone will pay for it," said the analyst, stating what seemed, to him, obvious.

The moment crystallized what Wien already suspected: They're letting the tape tell them what a company is worth. No wonder, when a stock took a dive, the analysts who followed it were just as surprised as everyone else.

They're letting the tape tell them what a company is worth!!

Do you let the market price tell you what a stock is worth?Do you let the market price tell you what is and what isn't a good stock?

As can seen by this simple story from Byron Wien, and of course as mentioned precisely by John Galbraith in his book, A Short History of Financial Euphoria , at the peaks of the markets, whether it is a bull or a bear, folks have this self-belief that they are right, in regardless of what the actual situation might be.

Think of Jan 1975, in which Richard Russell in his newsletter made his finest call, in which the crash of 1973-74 had send the market rock bottom. The Dow was now cheaper than it would be at any time for the rest of the century. Eagerly, Russell trumpeted the good news. It was time to buy stocks, he told his subscribers. (pg 7).

But what was he greeted with? Nothing but hate mail!. "I don't want to hear about stocks!". "How dare you tell us that this is the begining of a bull market".

Or how about as in Wien's example? 1999. Analysts were rating a stock more simply because they knew others were willing to pay more for it!

And as Galbraith puts it: No wonder, then, that during such periods, doubters are silenced.

Ahh... very intresting comments from Wien again, isn't it? Analysts were rating a stock more simply because they knew others were willing to pay more for it!

"Markets go down because they went up," James Grant reminded his readers in the late nineties. "Where the free enterprise system shines is in its treatment of failure," he added.

"Individuals as individuals, are always error-prone... [they] also make collective mistakes. They overinvest, then underinvest. The underinvestment portion of the cycle is dealt with constructively, with new business formations, bull markets, and initial public offerings. The overinvestment problem is dealt with the emphasis on demolition: with bankruptcies, bear markets, consolidations, and liquidations... Without miscalculation there would be no price action, no capital gains, no losses and no commissions. "

Cycles, then, drive markets: three steps forward, two back. Without the alternating rhythms of expansion and contraction, rising prices and falling prices, there would be no movement. In Grant's terms, "A boom is just capitalism's way of setting up the next bust" (James Grant, The Trouble With Prosperity , pg 250)

... The great virtue of laissez-faire capitalism, say its staunchest admirers, is that it allows a boom to run its course, and then lets the bubble collapse. With the hissing sound comes a correction: investment mistakes are repriced and unprofitable companies go bankrupt. "The errors of the up cycle must be sorted out, reorganized or auctioned off," Grant observed.

"Cyclical white elephants must be rounded up and led away." Only then can a capitalist economy resume its progress. The correction clears the way for another cycle.